On July 18, 2011, in a thorough opinion (available here), Chief Judge Fitzwater agreed with the SEC that Mark Cuban’s unclean hands defense should be struck. The SEC had instituted an enforcement action against Cuban, alleging that Cuban violated the securities acts by selling shares of stock in Mamma.com after learning material, nonpublic information concerning a planed private investment in public equity offering by the company, thereby avoiding substantial losses when the stock price later declined. In response to the SEC’s Complaint, Cuban pled unclean hands as an affirmative defense.
Chief Judge Fitzwater rejected the SEC’s argument that unclean hands was unavailable as a matter of law, finding that it is available, but “only in strictly limited circumstances when the SEC’s misconduct is egregious, the misconduct occurs before the SEC files the enforcement action, and the misconduct results in prejudice to the defense of the enforcement action that rises to a constitutional level and is established through a direct nexus between the misconduct and the constitutional injury.” Because Chief Judge Fitzwater found that Cuban had not sufficiently pled that Cuban suffered prejudice due to the SEC’s alleged misconduct, the SEC’s motion to strike the defense was granted.
(Chief Judge Fitzwater’s decision also noted that he has, thus far, declined to apply the plausibility standard of Twombly and Iqbal to affirmative defenses.)